The recent visit of Pakistan’s Prime Minister in Beijing led not only to mutually beneficial trade and investment deals. It also heralds China’s rebalancing in South Asia.

“Our friendship is higher than the Himalayas and deeper than the deepest sea in the world, and sweeter than honey,” Pakistan’s Prime Minister Nawaz Sharif told his Chinese counterpart Li Keqiang at the start of their meeting.

Sharif’s visit – his first overseas trip since the victory in the May 11 elections – anticipates a critical shift in Pakistan’s economic and foreign policies.

From deals to game changers

In Islamabad, China is today seen as a regional counterweight to Washington and NATO. Beijing supports Islamabad’s position on Kashmir, while Pakistan supports China on the issues of Xinjiang, Tibet and Taiwan.

Economic cooperation has accelerated with a free trade agreement and China’s assistance in the development of Pakistan’s infrastructure. In 2012, the two-way trade exceeded $12 billion. The volume is reminiscent of that between China and Nigeria, a major energy powerhouse in Africa.

Last year, China purchased more than half of its oil from the Middle East. China is also the largest investor in Pakistan’s deep-water port at Gwadar, which is located at the month of the Strait of Hormuz. In the long-term, the two countries hope to connect Kashgar in western China to the Arabian seaport of Gwadar.

Some 60 percent of China’s oil comes from the Gulf by ships traveling over 16,000 kilometers in 2-3 months, but Gwadar could reduce the distance to 2,500 kilometers and serve round the year.

Typically, Washington and New Delhi see Gwadar less as economic and more in strategic terms – as a key part of the alleged Chinese strategic ambition to project its power into the Indian Ocean.

While the project could prove a “game changer” for both Pakistan and China, it is not without challenges. The route will run through Baluchistan province, where gas and mineral projects have already sparked insurgencies.

Lost opportunities, political shift

In Pakistan, Sharif’s Muslim League (PML) is hoped to rejuvenate the economy, improve security, contain the jihadist attacks and bring an end to U.S. drone strikes. However, Sharif’s overriding focus will be on economic development.

Only half a century ago, Pakistan’s average economic growth rate exceeded that of the world economy. By the 1960s, the country was the model of economic development around the world, including South Korea.

In subsequent decades, fiscally imprudent economic policies contributed to rapid increase public debt and slower growth. Since the late 1990s, Pakistan has been hit by a series of adverse events – from the Asian financial crisis and economic sanctions, to the massive influx of refugees, huge natural calamities and a threat of a nuclear conflict with India.

Since the global recession in 2008, real GDP growth has averaged only 3 percent annually, which is insufficient to achieve substantial improvement in living standards and to absorb the rising labor force.

Economic challenges have been accompanied by political shifts. As the Bhutto dynasty is fading into history, the PPP (the Pakistan Peoples Party) has lost the support of the nation.

After 2008, the PTI (Pakistan Movement for Justice), led by the charismatic Imran Khan, emerged as a popular counterweight to both PPP and PML. In late 2011, Khan said in a Newsweek interview that “China has a lot of experience pulling hundreds of millions of people out of poverty—and that’s what Pakistan needs, poverty alleviation.”

The most tangible proof of Pakistan’s wasted resources (and conversely, its future potential) is its economy. After a decade of U.S.-Pakistani cooperation in the “War against Terror,” Pakistan’s economy is alarmingly fragile.

In 2012, the GDP amounted to $232 billion, which was 20 billion dollars less than that of tiny Finland. While Pakistan has some 180 million people, Finland’s population amounts to 5.3 million.

Even worse, the economy is deteriorating. Despite slight export growth, external position has been softening. The real challenge is the drastic decline of financial inflows, particularly foreign direct investment (FDI), which has shrunk to a third of its fiscal 2011 level.

As the security situation has worsened in major cities, from Islamabad and Karachi to Lahore and Rawalpindi, foreign embassies and consulates have been busy leaving the country and divesting their assets. Meanwhile, massive electricity shortages have contributed to increasing uncertainty about Pakistan’s future and the reduced FDI inflows. As a result, external public debt repayments are draining reserves.

With the landslide election victory, PML reduced its chief rival – The Pakistan Peoples Party of President Asif Ali Zardari – to a third of its previous strength in parliament. Consequently, PML could make difficult decisions on its own. That, however, requires true progress on critical structural reforms, especially in tax administration and the energy sector, both of which have effectively stalled and remain politically sensitive.

In December, Pakistan’s public debt-to-GDP ratio stood at 58 percent. In June, Pakistan’s Finance Minister Ishaq Dar described the economy as “shattered.” Islamabad is expected to approach the IMF for “anything between $5 billion to $7 billion,” Dar told Bloomberg.

China’s recalibration in South Asia

In the 1950s, Islamabad was among the first to recognize the People’s Republic of China. Following the 1962 Sino-Indian War, both countries began to nurture a close relationship. Military assistance ensued in 1966. A strategic alliance followed in 1972 and economic cooperation in 1979.

Today, China is Pakistan’s largest supplier of arms and its third-largest trading partner. The two are cooperating in Pakistan’s civil nuclear power sector. Beijing has helped in building the Khushab reactor.

During Obama’s first term, Washington initiated an extensive pivot from Europe and the Middle East to Asia. Today, U.S. rebalancing is going hand in hand with Chinese recalibration in the region, including South Asia.

As the presence of the United States in South Asia will gradually wane, China’s role is steadily increasing in the region. The former was predicated on largely U.S. military concerns in Afghanistan and Pakistan, and it came with substantial defense assistance sweetened by aid packages.

Chinese rebalancing in South Asia will be based primarily on the mainland’s energy concerns, economic imperatives in Pakistan, and bilateral cooperation to contain Islamic insurgencies in the restless border regions.

However, Chinese rebalancing is not only a response to the Obama pivot in Asia. It also reflects China’s rising strategic weight, the structural crises of the major advanced economies, and the shift of economic momentum to Asia.

A short version of the commentary appeared in the South China Morning Post (Hong Kong) as “In Rising Asia, China-Pakistan relations grow closer” (July 13, 2013)